Tuesday, December 30, 2008

Thanks to the Federal Reserve, interest rates are lower than ever. That would normally lead to home owners refinancing home mortgages in order to lock in lower rates, lower payments and (for some) to keep their homes. A good thing for a troubled economy with some homeowners in trouble. But, as Jason Kilborn has warned us, not so quick (see Refi No Good --- A Lesson in "LTValuation"). Home prices in twenty American cities dropped 18% in October from the last year according to the S&P/Case-Shiller index . Unfortunately, the twenty city index has been dropping since January 2007. All of this means bad news for homeowners who are seeing the value of their home drop each and every month.

So, what does this really mean? Well, we are considering refinancing our home in Boston where the new October 2008 index is 159.17. The last time the Boston index was about the same level was February 2004. As it turns out, this was when we purchased our home. In September 2005, the highest index was reached in the Boston Metro area at 182.45. The current level is almost 13% off the highest point reached on the index. But, we might also expect the numbers will continue to decline for some additional time, representing further erosion of home values. How bad the news is depends on where you live and when you bought your home. Some cities like Miami, Phoenix and Las Vegas have suffered the largest declines on the index, whereas cities like Charlotte, Dallas, Cleveland and others have only felt modest changes.

For us, who knows? Our Boston home is not worth what it was in 2005, but the drop is not as bad as some cities. Like Jason's refi gone wrong, the discretion of appraisers will dictate whether refinancing makes sense. The problem for homeowners is that they may not be able to take advantage of lower rates. For more on this, Urban Deveopment Secretary Steve Preston recently spoke on the Future of the Housing Market.

1) Detroit execs flying to D.C.: The chief executives of General Motors (GM,Fortune 500), Chrysler and Ford spark outrage when they fly their corporate jets to Washington D.C. to beg Congress for a multi-billion dollar bailout. More

2) Detroit execs driving to D.C.: Given a second chance after the private-jet fiasco to plead their case before Congress, the Detroit 3 take to the road. More

3) Henry Paulson's initial $700 bailout proposal: All of three pages, the Treasury Secretary seeks carte-blanche access to government funding with scant details on how or where the money will be spent. More

4) The final bailout: When Congress is done with it, the measure balloons to 451 pages and is loaded with pork barrel spending - including, unbelievably, a cut in taxes on toy arrows and an extended tax break on "wool products." More

5) The Mozilo e-mail: The now former Countrywide CEO mistakenly broadcasts his thoughts on a customer's plea for help with a home loan. More

7) Paulson's 'bazooka': The Treasury Secretary tells Congress in July he thinks hewon't actually need to use the funds he's requesting to support Fannie Mae and Freddie Mac. More

8) Tough talk from Fannie Mae: In May, CEO Daniel Mudd says his company will "feast" on weakened competition in the mortgage market. More

9) Scandal at the Department of Interior: The agency's Inspector General finds that staffers were taking gifts, having sex and engaging in illegal drug use with employees of some of the oil companies they oversee. More

10) GM's Lutz on global warming: The General Motors exec behind the Chevrolet Volt electric car hands environmentalists another twig to beat GM with when he reportedly calls global warming "a crock of sh-t." More

11) Hopefor Homeowners - er, not really: Congress passes bill to keep hundreds of thousands of troubled borrowers in their homes. A whopping 321 applications get filed. More

12) Ban the short-sellers: To head off a market onslaught,the SEC outlaws short-selling on 799 financial stocks. Remarkably, investors find other ways to punish the group and the sector sinks another 25 percent. More

13) McCain on economics: On the morning of Sept. 15, as Lehman Brothers declares bankruptcy, Republican presidential candidate John McCain declares "the fundamentals of this economy are strong." More

14) Obama's tough talk on Nafta: A top economic adviser privately assures Canadian officials in February that his candidate didn't really mean it when he threatened torenegotiate the North American Free Trade Agreement. More

15) Microsoft bids for Yahoo: The $31-per-share offer represents a 61% premium over Yahoo's YHOO, Fortune 500) price at the time of the February overture. More

16)Yahoo turns down Microsoft's offer: If Microsoft's (MSFT, Fortune 500) offer forYahoo was wrong-headed, Yahoo's opposition to it was downright bone-headed. More

17) The Madoff miss: As news reports reveal that the Securities and Exchange Commission had probed Madoff and his New York City investment firm over the years, chief Christopher Cox cops to the embarrassing screw-up. More

18) Oil speculator scapegoats: Are speculators to blame for $37 oil too? More

19) Steve Jobs' obit: In August, Bloomberg News accidentally releases an obit for Apple CEO Steve Jobs, who - despite a well-publicized brush with pancreatic cancer - is still alive and kicking. More

20) Phil Gramm and the "nation of whiners": In early July, as the financial crisis spreads to Main Street, McCain campaign co-chair and former senator Phil Gramm appeals to voters and their economic anxieties by calling them a "nation of whiners" and dismisses a troubled economy as a "mental recession." More

Friday, December 19, 2008

The financial condition of university endowments is continuing its downturn. About a month ago, I blogged about the troubles that many universities were facing (University Endowments and the Financial Crisis). Things have gotten worse. As one of our commenters mentioned, Vanderbilt University, which had reported a positive return, may be in the same condition as other universities financially. At the very least, universities are cancelling bigger projects widely. Over at Harvard, this are equally grim (see Pushkin Comes to Shove for Harvard Faculty as Endowment Plunges). Yeshiva University anticipates that its losses from the Bernard Madoff scandal alone will top $140 million.

Endowments provide scholarship aid to students, fund faculty salaries and projects, support research and facilities. Like all investments, university administrators must exercise due diligence in the use of endowments funds. Should universities be in a better situation in this time of crisis than investors in general? Vanderbilt seems to think so according to its "Giving to the Future" endowment brochure. In it, Vanderbilt emphasizes that with "careful investment and adherence to sound financial principles, the endowment will continue to grow and support Vanderbilt, now and in the future." My suspicion is that that most universities ascribe to the same standards.

Have universities met this standard? It seems not. Over at Yeshiva, university trustee and chair of the investment committee J. Ezra Merkin resigned in the fall out from the Madoff hedge fund losses. Jim Chen wrote earlier this week criticized the "cowboy philanthropy" approach to charitable gifts that does not seriously consider duties of stewardship (see Curtains on Cowboy Philanthropy: a Cruel Lesson From the Maddoff Scandal). While we reflect on the changes that must be made to the financial industry as a whole, we must also take a closer look at university investment practices that allowed them to sustain the level of losses that have occurred. Sure, even careful investors took heavy losses during this severe downturn. But, universities must also ask whether in their hurry for new buildings, research projects and greater prestige, they also sacrificed sound financial principles that would have seen them better through this crisis. Years of healthy returns on investments may have lured ordinarily careful universities into more risky investments. Recovery will be slow, but will we make better decisions in the future?

Thursday, December 18, 2008

More evidence that the financial sector is squandering the hard-won rescue funds from Congress: Not only are banks not lending to rejuvenate business, especially to the small-business backbone of the American economy, they're making existing loans rapaciously expensive for good borrowers. This can have no other effect than to drag down our struggling economy further. The story linked above observes that the banks' lame excuse for raising rates on small businesses and individuals is a vague reference to "economic reasons." What reasons? That the banks need more money from good risks because they've so messed up their investments in bad risks? I can't believe Congress hasn't jumped on this kind of thing more aggressively . . . yet.

The idea of nationalizing the banking sector is sounding better and better. The W$J reported yesterday that regulators have become more involved in internal strategy for struggling Citigroup. Perhaps this (and the FDIC's role in managing IndyMac's troubled mortgage portfolio) will be a model for the future. Even if you believe that "Socialism" is bad, some form of level-headed government oversight HAS to be better than the foolishness we're seeing from these banks.

Monday, December 15, 2008

You may want to mark your calendars for next June's AALS Workshop on Transactional Law, June 10-12, in scenic Long Beach, California. If you go, keep your eyes open for flying buses and '67 Shelby GTs. (Both scenes are set in or entering Long Beach; and yes, the dialogue in the second one is in Espanol.) The workshop is part of the AALS Mid-Year Meeting. Program details are not yet available on the AALS web site. However, the November AALS News provides the following description, as well as a list of topic and speakers and registration information that you can access by clicking this link.

“Transactional law” refers to the various substantive legal rules that influence or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the “law of the deal” (i.e., the negotiated contracts) produced by the parties to those transactions. Traditionally, the law school curriculum has emphasized litigation over transactional law. However, many modern lawyers serve corporate clients, and a significant percentage of lawyers engage in some form of transactional practice. Hence, law schools must place greater emphasis on training law students to be transactional lawyers, and should support law faculty engaged in scholarship focused on transactional law. To this end, in 1994, the AALS held a workshop on the transactional approach to law, which sparked experimentation and innovation in teaching and scholarship related to transactional law. Since that time, there have been significant developments in transactional law. This Workshop not only will take stock of those developments, but also will enable participants to gain some in-depth perspective regarding the relative benefits and drawbacks of those developments.

Law schools have attempted to respond to the demand for increased transactional training in a variety of ways, from integrating transactional law into traditional law school courses to developing stand alone “Deals” or “Business Planning” courses. A number of law schools have developed innovative programs in transactional law.This Workshop will enable participants to discuss specific methods of teaching transactional skills with an eye towards ferreting out best practices. Should professors interested in teaching transactional law focus on substantive law, “transactional skills,” (i.e., planning, negotiating, and drafting), economic or other theories of business transactions, or all of the above? Should transactional skills be taught in separate courses or integrated into substantive courses?If taught in separate courses, should such courses be part of the first-year curriculum, integrated throughout the three years, or focused on the upper-level curriculum?How do you modify or supplement the traditional case method to teach students useful transactional skills?The Workshop also will explore the challenges and benefits that arise for those who write or would like to write transactional scholarship.And as initial matter, the Workshop will address how best to define “transactional scholarship” in a way that accurately captures the potential breadth and depth of transactional law, and how transactional scholarship differs from traditional legal scholarship.

The Workshop also will explore best practices for writing scholarship in this area, including methodologies for researching the legal, financial and practical effects of various corporate transactions. The Workshop will feature concurrent works-in-progress sessions, enabling participants to exchange ideas and insights regarding new scholarship related to transactional law.

One important goal of the Workshop is to bring together faculty from different doctrinal areas of law, including faculty who teach in the clinical setting.Transactional law touches many substantive areas of law, and it is closely identified with bankruptcy, business associations, contracts, commercial law, intellectual property, labor and employment law, securities regulation, and taxation.The Workshop will provide a unique opportunity for faculty members to make connections between their primary fields and transactional law, and thus should appeal to a broad spectrum of scholars and teachers.

A short program, featuring remarks by Professors Jim White (Michigan) and Bob Summers (Cornell), Dick's long-time collaborators, and Deans Kevin Cole (San Diego) and David Van Zandt (Northwestern), will begin at 7:00 p.m. The organizers will also videotape remarks from those who knew Dick or his work and will provide a copy to Dick's family.

Fannie Mae has announced that tenants will be permitted to stay in foreclosed homes. A nice touch during the holiday season for sure. Imagine being a paying tenant who gets an eviction notice at the holidays. The hassles of moving makes me shudder. Moving also adds moving costs, new security deposits and perhaps increased rent to the budgets of many families in low-income apartment complexes that are foreclosed.

Here enters Fannie Mae the landlord. Fannie Mae will execute new leases with the paying tenants in foreclosed properties, who would otherwise face eviction. Perhaps I am missing something here, but in light of the current market, this is long overdue. Normally, the government having all the headaches of a landlord (maintenance, rent collection, etc.) of these properties would not be ideal. Let's hope this isn't a long term solution. With plenty of vacant properties around, however, evicting paying tenants would seem to increase the losses that Fannie Mae would face. In many cases, these properties will be worth more with paying tenants than sitting vacant.

For now, at least the government should collect rent. Now I just wonder what kind of landlord will Fannie Mae be? Now, a bit of humor during these hard times is a good thing. Will Farrell's short on the "Landlord" comes to mind. For those of you with sensitive ears, don't push play.

There is no end to bad financial news. The latest is a good old-fashioned ponzi scheme resulting in losses of about $50 billion that took place over decades. Basically a ponzi scheme is just a high rate of regular return given in order to entice new investors whose money in turn is used to pay existing investors without creating any underlying earnings for the payout. This time run by Bernard Madoff, an investment banker who formerly served as chairman of the board of directors of NASDAQ. Madoff was turned in by his own sons to the F.B.I. and charged with fraud.

The timing of Madoff's undoing could not be worse, but not surprising. Madoff's classic ponzi scheme depended on continued new investments. With the markets in turmoil, those new investors must have been impossible to bring into his venture. Today marks continued trouble for the stock market and manufacturing shows an even worsening economy. Even Apple has been downgraded to "neutral" by Goldman Sachs Group Inc. from a previous "buy" status. Add to all of this the lack of resolution concerning the prospects for the U.S. auto manufacturers.

Madoff's scheme is set to further erode investor confidence. Although we might call for increased investor due diligence, many thought that Madoff was a safe player. Many large banking institutions from around the world have announced billions in losses on the Madoff scheme already. What's to come? For starters, I suspect we will see more calls for Congressional hearings and even more calls for greater regulation of the investment community.

Thursday, December 11, 2008

I saw this article in the WSJ about children selling their toys on Ebay, Craigslist and other sites in order to raise money for new toys that their parents cannot afford this year due to the troubled economy. Other kids are selling toys just to be able to buy gifts for others or to help with family finances because a parent is out of work. Yikes! It's a tough world out there right now.

Having just written the examination for my first year Contracts I students, thoughts of contracts avoidable by minors comes to mind. My little boys would hardly part with their toys to share with each other (being just 1 and 3), let alone to sell to a stranger. And, does a child that becomes a little entrepreneur selling a whole host of toys on Ebay make them a merchant for purposes of UCC 2-314? Let's hope not.

Thankfully for my students, its too late for me to wrap this one into the examination.

The government announced today that American's household debt fell for the first time ever during the third quarter. Unfortunately, net worth also fell due to declining home and stock prices. Good news? It doesn't seem so. A big part of the reduction in debt is apparently the foreclosed homes which are moved out of the debt numbers. So, we have less debt because less people now own their homes. And, then there's that darn credit crunch keeping lending rates for consumers higher which in turn keeps them from spending. Others may not even be able to obtain loans for common consumer purchases like cars.

I like the idea of less debt in general. In this case, though, it is not a good sign for the economy.

Tuesday, December 9, 2008

The new trend in executive compensation seems to be $1. AIG and the auto CEOs have all agreed to salary cuts to just $1. Of course, the compensation will not really amount to $1, as there is also equity compensation. This $1 compensation news is followed by a new Corporate Library report finding CEO compensation being up 7.5% for 2007. Should we expect any difference for 2008? Not likely. Even John Thain of Merrill Lynch only folded in his request for a $10 million bonus under outside pressure. Apparently, Thain had not been independently dissuaded from his request by the billions in losses Merrill sufferred in 2008.

But now AIG is under new complaints for "retention payments" made to key personnel. AIG has announced payments ranging from $92,500 to $4million to 168 AIG employees. While AIG has agreed to no 2008 bonus payments and no salary increases for 2009 for the top seven officers and no salary increases for the next fifty highest paid execs. Apparently, thirteen of those getting "retention" payments are executive officers of AIG who have agreed to defer payment to them until April 2009, but not to waive this additional compensation. Not surprisingly, some in Congress have complained.

The long-standing problem with executive compensation is that there are so many ways to pay corporate executives. That is, $1 is not really just $1. Compensation comes in so many other ways, from retention payments, bonuses, and perks like corporate jets. My biggest concern with paying these executives just $1 in salary is that their desire for some salary will now correspond to their ability to trigger equity payments. Short terms equity gains for these companies may not be the same thing as long term stability and growth. It would be much better to pay the executives a reasonable salary and forgo the equity. That raises the separate issue of loyalty to company prospects that might arise if executives don't have enough incentives to do their jobs well. Never mind the idea of doing a good job in order to keep one's job. There has been little mention on Capital Hill of the equity compensation that companies getting substantial federal bailouts have promised to senior management. While the stock of these companies may be worth little now, that might not always be the case. A little more talk about continuation of equity programs for these companies should be next.

This evening, I did a whirlwind trip through Target to purchase the collection of toys, hats, mittens and other gifts I've promised to donate to charity. Since I am woefully behind on my holiday shopping and short on time as a whole, I will be doing much of my remaining shopping on the Internet. Amazon.com is one of my favorite sites for easy shopping and will bail me out for my lateness this year. Of course, I will be using my credit/debit cards to make these purchases.

USA Today recently cautioned that big on-line deals could open customers up to scams and thievery. The Truth-in-Lending Act (TILA) Section 1643 protect individual cardholders from unauthorized use of credit cards with a liability not to exceed $50 and the customer does not have to pay the credit card bill for unauthorized use. See Koerner v. American Express Company for a good discussion of issues under TILA generally, especially with company credit cards). Debit cards, though, are altogether a different matter not governed by TILA. Instead, the Electronic Funds Transfer Act (EFTA) applies. While the EFTA would allow greater losses for cardholders, Mastercard/Visa have erased the liability differential for consumer cards. The primary problem with the debit card, however, is that the money comes directly out of your checking account, with the potential for returned items and overdrafts in the event of theft. While a bank sorts out the problems and gets you the money back, you may find yourself short on cash.

Surely, banks are getting a whole lot of bad press here and elsewhere of late. So, here's something to warm the pocket book of those who like to shop on the Internet this time of year. Bank of America is now promoting two products designed to prevent fraud. The first, ShopSafe is a free service that allows users to have a temporary card number each time they make an online purchase.The second, SafePass, gives you a 6-digit, one time passcode sent as a text message to your phone or created from a wallet sized card. The extra card costs $19.99. Of course, the code expires once you use it so that a hacker/thief could not use it for later transactions. The SafePass can be used for Bill Pay transactions to keep others from creating unauthorized transactions on your account.

Other than the $19.99 price tag for the extra card on the SafePass, the BOA products seem like pretty good ideas. If you have a generous text-messaging allowance on your cell phone, it would seem to be free to use. With the large amount of purchasing moving to the Internet it seems logical for banks to move to greater security measures to counter fraud. The biggest impediment here seems to be the cost of such programs and getting consumers to use them. While I have an account with BOA, I learned about these new programs from a news piece. Again, getting customers to use the programs is a problem as even the text messaging for the SafeShop will require the customer to take an extra step to get the special number before making each and every purchase. With consumers desiring products that have easy use, this extra step could pose a hurdle selling the product to cardholders.

In the meantime, my credit cards are looking good here for Internet purchases.

As predicted, at least two of the Big Three auto makers are headed into an out-of-court workout orchestrated and likely financed by the U.S. government. My new favorite quote is from Nancy Pelosi: "We call this the barbershop. Everybody's getting a haircut here . . . ." She included management in the list of parties who will be called on to make concessions--including dumping those fancy corporate jets (talk about bad PR!)--in exchange for government financing of the workout (let's just call it DIP financing, shall we). The W$J story aptly compares the workout procedure to bankruptcy, which is, of course, exactly what's going on here, though the informal process will lack both the psychological stigma of "bankruptcy" and the muscle that the Bankruptcy Code would provide in dealing with leases and intransigent holdout creditors. The primary purpose of Chapter 11, in my view, is to allow a majority-approved workout plan to be forced--"crammed down," as we say--on dissidents. I guess the gravitas of the U.S. government will be the 800-pound gorilla in this deal.

I'm getting closer to figuring out who will be sitting in the barber's chair in the Tribune Company bankruptcy, too, especially in terms of employee retirement and other claims. It seems that we have good news and bad news.

The good news is that, while 100% of the company's stock is held by an Employee Stock Ownership Plan (ESOP), very little time has passed since that plan took over the compay's equity, so employees apparently have made no concessions or contributions to the plan, which will now likely be wiped out in the bankruptcy. While the employees are technically the beneficiaries of the stock held by the ESOP, the trust obtained the stock through a $250 million loan from the company, so employee rights in the stock would have vested only over time as the the company reduced the ESOP trust's debt by making annual contributions to the ESOP. Since this hasn't happened yet, the employees will really lose next to nothing in terms of retirement assets--thank goodness. Most of this is explained in a wonderful note by Corey Rosen, executive director of the National Center for Employee Ownership. Ironically, from the employee retirement assets perspective, it's probably actually a rather good thing that the company sought bankruptcy earlier rather than later (before it put lots of employee retirement contributions into the ESOP black hole). The compay's "pension plan," which closed last year, seems to be safely outside the bankruptcy case in a fully-funded $1.8 billion trust (beneficiaries with "frozen" pension rights should be safe). The same is true of the 401(k) plan set up by the company, but to which the company discontinued making employer contributions when the ESOP was set up.

The bad news seems to be that the the primary part of the three-part Tribune employees' future retirement plan seems to be up in the air now. The first, a "cash balance," low-risk money fund that will hold planned 3% annual cash contributions (the first to be made in 2009), will apparently be unaffected (though one wonders what future contributions will be). As for the second part of the plan, employees can continue to contribute themselves to a 401(k) account (though employer contributions were suspended last year). The cornerstone of the company's post-2008 retirement plan, however--the ESOP--will in all likelihood be gutted in the bankruptcy. In addition, as described in this fantastic New York Times summary of the situation, the "little guys" with the most to lose are those who recently accepted buy-outs and severance deals. This includes folks like a reporter mentioned in the NYT story who just sent in his paperwork to accept a buy-out equal to 49 weeks' pay (severance for more than 24 years of work)--a deal that is now in jeopardy as these types of people join the ranks of unsecured creditors. Luckily for these folks, up to $10,950 per person of such claims, earned within 180 days of yesterday (the filing date), will be § 507(a)(4) "priority" unsecured claims, which get to budge in line ahead of the general unsecured creditors (probably including the banks and bondholders).

Monday, December 8, 2008

The plot thickens? The Tribune Company's bankruptcy petition and related statements are online, courtesy of the L.A. Times. As I mentioned in my earlier post, Zell's stake in the company is reportedly represented primarily by a $225 million 11-year subordinated note. I went hunting for this obligation in the "Consolidated List of Creditors Holding the Thirty Largest Unsecured Claims Against the Debtors," and I couldn't find it. The range of claim amounts is quite broad, from the $8.57 billion owed on the senior bank facility all the way down to a $1.69 million claim by Paramount Pictures Corp. for "trade debt" (maybe licensing fees or something?). Where's Zell's $225 million note? I wouldn't expect to find Zell's name on the list--doubtless, he made the loan through one (or more) of his companies. But of the several mentions of "subordinated promissory notes due 2018" (which would precisely describe the notes I would expect to find reflecting Zell's stake), all five are listed as much smaller amounts ($3.3 million, $2.8 million, down to $2.16 million). These notes are held by companies named "Tower XX, LLC" (where XX is a two-letter combination that differs for each company), c/o Equity Group Investments (which I believe is Zell's company). The five notes add up to only $13.4 million--a far cry from the $225 that the reports I had seen suggested for Zell's position. Is the remainder broken into dozens of notes for less than $1.691 million (the smallest claim on the list)? Curious.

As mad as the creditors are likely to be about this, the shareholders--especially the employees--are likely to be hopping mad when the facts emerge about how this company will restructure. Tribune Company is "America’s largest employee-owned media company," and many employees were unhappy about Zell's takeover/privatization of the company, as well as his capitalism-heavy-journalism-lite management refocus, and now they'll have reason to be really upset. While Chapter 11 may well not mean the demise of the company, it will almost surely mean the complete or near complete destruction of whatever value the employee's ownership stake (equity) might have had before the filing. The reorganization will almost certainly result in a debt-for-equity exchange, where current equity gets squeezed out (at least for the most part) and big debtholders take over that equity in exchange for discharge of debt. The absolute priority rule will almost certainly prevent equity (shareholders) from retaining any significant stake if some significant group of creditors will have "no recovery." Unless every creditor class can be convinced to vote in favor of a plan that leaves some value for equity, the company will be unable to confirm a Chapter 11 plan. Indeed, one wonders what Zell plans to do about his own equity stake.

Maybe there are more surprises waiting in the wings here, but this is yet another sad day in a long string of sad days for the Tribune Company's employees, who seem to have been largely involuntary passengers on Zell's pirate ship to Chapter 11.

Update: A little surfing answered my question about Zell's personal stake and added an interesting twist to the case. Zell's $315 million (!) investment in the going-private deal was structured as a $225 million subordinated 11-year note and a $90 million warrant to purchase up to 40% of the company's shares within 15 years from the Employee Stock Ownership Plan that now owns 100% of the Tribune Company's equity. Thus, Zell's $90 million warrant is likely worthless (or nearly so) after the bankruptcy filing (for the reasons discussed above), but his $225 million note is debt, which will likely be promised some distribution in a Chapter 11 plan. I intend to follow this (for me, local) case in the days ahead, focusing on the word "subordinated." While Zell's note now is likely subordinated only to the other company debt (both public bonds and bank loans), it might well ultimately be equitably subordinated under Bankruptcy Code § 510(c)(1) to the ESOP's share interest, which Zell's going-private transaction has now all but completely destroyed. Stay tuned!

Friday, December 5, 2008

Following up on my refi post, I share a lesson I learned today (when my own refi deal tanked) that suggests one reason why efforts to stabilize the housing market are foundering.

I still recall the point in my first home purchase deal when I looked at the contract and asked my realtor what it meant that a condition of the deal was my ability to obtain financing at [blank], and she had filled in the blank with "80% LTV." She couldn't explain it to me--she just always put that in the blank (!). I now know all too well what that means, and it killed my refi attempt. LTV stands for "loan to value," and it represents the ratio of the loan amount to the value of the property; e.g., an $80,000 loan secured by a mortgage on a $100,000 home is "80% LTV," while a $90,000 loan on that same home is 90% LTV, the wrong direction if you're the mortgage banker considering making the loan. The bank (mortgagee) wants an "equity cushion" (value in excess of the mortgage-secured loan) to protect the bank in the event that the loan defaults and the bank decides to enforce the mortgage ("foreclosure"). Indeed, borrowers who need to borrow more than 80% of the home's value (that is, can't afford a 20% down-payment) often have to pay "private mortgage insurance" (or "PMI") to protect the bank in case a foreclosure sale's proceeds don't cover the defaulted "more than 80% LTV" outstanding loan.

As in many other aspects of commercial law and practice, valuation thus becomes the key to the deal. Entire courses (probably series of courses) in business departments are dedicated to the variety of methods of valuing things, including real (immovable) property. The appraiser who tried to value my home for the refi (to establish at least 80% LTV) decided that the identical townhome behind mine that sold a few months ago for a depressed price represented an inflated comparable value for my home--since it sat on the market for a few months, he decided that the purchase price should be further depressed by more than 10% to represent its true "value." Good grief! I can imagine discounting a recent sale price if there were evidence that the local market had softened in the intervening period (my appraisal didn't suggest anything like this). But otherwise, if someone just paid $X for an identical home a few months ago, I would think $X would be a pretty good comparable for the value of my home, regardless of how long that other home sat on the market. Indeed, it's perfectly obvious that the other place sat on the market so long because the original asking price (which was nearly $30,000 over $X!) was too high, and when the right price was asked, it sold. That's how the market works. Now two townhomes in my association have sold for exactly $X, but the appraiser thinks my place is worth $X minus 10% because it took so long to sell one of the other places? Please!

I'm now convinced that throwing more money at banks is not the solution--they have proven that they lack the resolve, willpower, or whatever to deal responsibly with this crisis. I hereby nominate Sheila Bair (FDIC Chairperson) as the new tsar of a nationalized housing lending industry. O.K., I'm kidding . . . but only a little.

Thursday, December 4, 2008

I just can't resist the pun opportunities presented by Bally's second bankruptcy filing in 14 months. Apparently, Bally has not internalized its own core message to its customers: you have to burn more calories than you take in (in other words, burn off more debt than you take on). With $1.4 billion in assets and only $479.5 million in net revenue for the 9 months ended September 30, 2008, Bally's $1.5 billion in debt leaves its balance sheet looking almost as flabby as it did when the company went on its first crash bankruptcy diet in 2007. Bally's personal trainer--Bankruptcy Judge Burton Lifland in the Southern District of New York--now has the second case, even before he had finished up the final details on the last one! Rather than focusing on toning up its balance sheet, Bally appears ready to throw in the towel and pursue a negotiated sale. One hopes the new owners will impose a stricter nutrition/workout regime on Bally, unlike the bloated hedge-fund firm that now owns it (these hedge funds are becoming infamous for their force-feeding of other formerly fit companies like Mervyn's).

Tuesday, December 2, 2008

Exams have me sidelined recently, but I wanted to be sure to point out one very nice effect of the Fed's most recent efforts at loosening up lending markets. Mortgage rates have fallen precipitously in the past two weeks. My lender, JPMorgan Chase, is offering 5.25% today, though this lowest rate requires payment of a point. Even for no points, many qualified borrowers can likely reduce their interest rates and monthly payments substantially in this new mortgage climate. Caveat:"qualified borrower" is a much more restrictive term today than in recent years. High credit ratings, substantial equity (at least 80% LTV), and documentable income are back in vogue. Indeed, the W$J reported this morning that self-employed professionals, even those with substantial equity, liquid assets, and reported incomes are having a hard time obtaining loans due to difficulty in documenting their pre-income-tax-deduction incomes.

If you qualify, look into refinancing. At current rates, it may well be worth it.

Saturday, November 29, 2008

Federal Reserve Governor Randall S. Kroszner recently testified on the effects of the credit crisis on small businesses at the House of Representatives Committee on Small Business. Not surprisingly, Kroszner said that small businesses are finding that loans are available on less favorable terms and subject to tightened standards. Kroszner seemed hopeful that the variety of programs recently implemented, though uncertain, should help small businesses.

The common theme that I see with the Treasury and Federal Reserve programs so far is that the programs are designed to re-building our economy without tackling the choices that landed us here. The programs are also targeted at the broader markets as a whole, hoping that they will have positive effects on consumers, homeowners and small business. As Kroszner mentioned, this has not happened yet. While many of us are harsh on the auto execs for their handling of the proposed Big 3 bailout, perhaps they really do have a point to make. Individual companies and industries beyond banking have also been hit hard by the financial crisis as a whole. We might be willing to allow the Big 3 to enter bankruptcy, but they won't be alone in ending up there.

Since we've been blogging about the proposed auto bailout, I wanted to post the SNL opening skit on the proposed bailout of the auto industry. Unfortunately, NBC did not post this skit on its site. I did find part of the skit, in case you missed it.

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Although the skit is a tad harsh, it does bring home the message that the U.S. auto industry must address regarding the perception of lagging quality of automobiles produced by the Big 3. As I said before, this really is about cars. Over at the National Small Businesss Association (NSBA), 80% of respondents said "no" to an auto manufacturer bailout. Without convincing Congress that the manufacturers have a solid plan, a bailout seems unlikely. Either the auto manufacturers will find a way through without federal help, or bankruptcy seems more likely than ever.

CALL FOR PAPERSSEARLE CENTER ON LAW, REGULATION, AND ECONOMIC GROWTH:SECOND ANNUAL RESEARCH SYMPOSIUM ON ECONOMICS AND LAW OF THE ENTREPRENEUR

The Searle Center on Law, Regulation, and Economic Growth is issuing a call for original research papers to be resented at the Second Annual Research Symposium on The Economics and Law of the Entrepreneur at Northwestern University School of Law. The Symposium will run from approximately 12:00 P.M. on Thursday, June 11th to 3:00 PM on Friday, June 12th, 2009.

The goal of this Research Symposium is to provide a forum where economists and legal scholars can gather together with Northwestern's own distinguished faculty to present and discuss high quality research relevant to the economicsand law of the entrepreneur.

Potential attendees should indicate their interest in receiving an invitation at: MAILTO:searlecenter@law.northwestern.edu

Authors will receive an honorarium of $1,500 to cover reasonable transportation expenses. Discussants will receive an honorarium of $500 to cover reasonable transportation expenses. Government employees and non-US residents may be reimbursed for travel expenses up to the honorarium amount. Authors and discussants are expected to attend and participate in the full duration of the symposium.

The Searle Center will make hotel reservations and pay for rooms for authors and discussants for the night of Thursday, June 11th. The conference is organized by Professor Daniel F. Spulber, Research Director, Searle Center Research Project on Innovation, Entrepreneurship, and Growth, and Henry N. Butler, Executive Director, Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law.

REVIEW PROCEDURE AND TIMELINE:

Conference Papers Submission Deadline: To ensure that attachments get through, papers for the conference should be submitted to both of the following email addresses:

Notification Deadline: Authors will be notified of decisions by April 1, 2009 Honoraria will be paid to conference presenters upon submission of a revised paper that the author is willing to put on the Searle Center website.

Potential attendees, potential discussants, or panel members should send a message indicating their interest to:

Email: MAILTO:searlecenter@law.northwestern.edu by March 15, 2009. The conference is organized in cooperation with the Journal of Economics & Management Strategy (JEMS). JEMS encourages submissions on the economics of the entrepreneur. Submissions are independent of the conference. Authors are free to publish their work in other venues (with appropriate acknowledgement of the Searle Center). To submit to the Journal of Economics & Management Strategy, send the paper in pdf form to: CONTACT: Alice Schaller Email: MAILTO:editjems@kellogg.northwestern.edu

Papers prepared for the Research Symposium on "The Economics and Law of the Entrepreneur" will be permanently hosted on the Searle Center website: http://www.law.northwestern.edu/searlecenter

The Searle Center on Law, Regulation, and Economic Growth at Northwestern University School of Law was established in 2006 to research how government regulation and interpretation of laws and regulations by the courts affect business and economic growth. Information on the Searle Center's activities may be found at: http://www.law.northwestern.edu/searlecenter

Tuesday, November 25, 2008

Today, the Federal Reserve also announced the Term Asset-Backed Securities Loan Facility (TALF), another program in the line of snappy acronyms. The Fed intends the TALF to help market participants to meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). The aim here is that if the Fed buys up some new and recently issued ABS, then lenders will turn around and relend the money to consumers who desire a student loan or a new car. Now, this program probably won't get really going to perhaps February, so consumers should not be expecting credit markets for consumer loans to ease in the immediate future. That said, some program for consumer credit is needed. But, is this the right one?

As a law professor, I can say that I want students to be able to get their student loans without too much hassle. Although I am not a big fan of excessive consumer debt, there is a need for credit to be available. The Fed's TALF program in its announced form is a continuation of the ABSs that have helped us to arrive at the financial crisis that we are in now. Some time ago, Alan Greenspan mentioned the problems arising from lenders incorrectly pricing ABS when they retain no stake in the ABS after sale. Basically, the risk models are prone to error in these cases. Though we don't have the details of the TALF program, I don't see any indication that the Fed is tackling this problem. This means that the risk problems inherent in our current financial crisis from securitization may remain with the TALF program as well.

So, for the next few months while credit remains tight, perhaps Americans will pay down those credit cards. Adding new credit come February when the Fed's TALF takes hold? Perhaps, but let's think carefully about it.

Today's housing news is grim. The S&P Case-Shiller Home Price national index reports a whopping 16.6% decline in the third quarter (compared to last year same time). The happy news here is that the Federal Reserve has just announced another program, this time to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs). That is: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Not surprisingly, the aim here is to lower the cost of home mortgages and increase availability in an attempt to stabilize the housing market. Not much on details yet, but this is the first major effort towards housing. Although much effort and attention has been on the health of the banks, the housing market has been waiting there, problematic as ever, needing attention. The Federal Reserve is overdue in tackling housing, but its not like they've not been busy.

I've got news for Nanci and others who might feel this way: GM and Chrysler are already in a "hole far too deep." Bankruptcy is not the causeof financial ruin; it's a response to the financially ruinous situation in which debtor-companies already find themselves. Indeed, bankruptcy in the form of U.S. Chapter 11 (and a growing number of similar laws around the world) is a response designed to overcome the problems that GM and Chrysler face, to facilitate a rehabilitation and get them out of the hole. It accomplishes this, in part, by making it starkly apparent that the end is nigh unless everyone stops playing chicken and seriously considers the shortest "haircut" they're willing to take (that is, the best concessions they're willing to offer to save the company), and irrational holdouts can get a deal "crammed down" on them by a majority vote of the more deal-welcoming creditors. Lenders, bondholders, suppliers, employees, retirees, shareholders, etc., all are forcefully seated at a "no B.S. zone" bargaining table and sternly instructed that if they leave, there's a cliff on the other side of the door.

The "hole far too deep" is where GM and Chrysler are now and where they and their various constituencies (not the least of which the U.S. economy) will be if solutions like a bankruptcy-like workout are not seriously considered . . . and soon.

That being said, for the reasons I mentioned before, I'm afraid an irrational overreaction by the market for GM/Chrysler's products might well scuttle its business if a Chapter 11 filing is made. The solution points up the misunderstanding inherent in Pelosi's comment: GM and Chrysler are already in what might be called informal bankruptcy. Either they respond to Harry Reid's demand to produce a workout proposal that the Treasury can fund by the beginning of December (an out-of-court workout, an informal "bankruptcy" that keeps that psychologically troublesome word out of the press), or they face literal "bankruptcy," which would strengthen the debtor-companies' hands with respect to their creditors, but might well destroy the "goodwill" upon which their business depends. Either way, GM and Chrysler are already in a "bankruptcy" hole, and their leaders and advisers need to go back to Capitol Hill, this time with a serious proposal for a sustainable workout, not just a handout.

Islamic Finance: A Guide for International Business and Investment (November 2008). This new book produced in association with the Institute of Islamic banking and Insurance, London, and released this week, provides valuable information to international investors and finance professionals about opportunities in the Islamic Finance sector, which is steadily growing at an annual rate of 10 to 15% and commands investments of nearly $800bn.

Islamic financing, still in an early developmental stage, departs from conventional financing in three fundamental ways. First, Islamic financing refrains from investing monies in interest-bearing instruments. This is so because the Quran prohibits charging interest on loaned monies. Second, Islamic financing refrains from investing in speculative investment products, such as options, futures, and derivatives. Third, Islamic financing refrains from investing in companies that manufacture or distribute socially harmful products, which may include weapons, liquors, and contrabands. Although these principles carry several exceptions, Islamic financing is markedly distinguishable from conventional financing. "And, at a time, when derivatives-based markets have failed, Islamic financial instruments, based on the firm establishment of underlying assets are going to be ever more popular."

Thursday, November 20, 2008

I am guessing you've heard the whole business about the auto executives using private jets to fly to Washington, D.C. for hearings on the bailout of the auto industry. Yesterday, Jason Kilborn blogged about the problems of encouraging bankruptcy when we normally avoid it at all costs in his post Little Guys v. Big Three in Bankruptcy. Things got beyond the issue of bankruptcy v. loan yesterday for the auto execs on Capital Hill making their plea for a $25 billion bailout. At the House of Representatives, Gary Ackerman (D) and Brad Sherman (D) blasted the executives for flying on private jets, rather than taking commercial flights.

Although the private jet expenditure might be unwarranted, this has become a distraction from the real issue. As Jason mentioned, there are questions about whether the auto makers can be competitive in the long term such that the $25 billion bridge loan requested is not just wasted. Loan terms are really a matter of contract. If the big three are really in dire straits, the government can (should be able) to dictate loan terms at will, from management changes and limits on compensation to forcing renegotiation of union contracts to more fuel efficient cars. Yes, this is really about cars, not planes.

Wednesday, November 19, 2008

Commercial Law is pleased to welcome L. Ali Khan as a guest blogger. Khan is a professor of law at Washburn University School of Law School where he teaches Payment Systems, Secured Transactions, International Law, International Business Transactions, Arbitration and Law and Human Rights. He has published books in the series Developments in International Law and much of his academic scholarship raises issues under Islamic law and conflicts involving Muslim communities. Ali also is the founder of the Islamiclawblog. One of his most recent articles, A Theoretical Analysis of Payment Systems, which will appear in the South Carolina Law Review, argues that modern payment systems, though different, should share a common theoretical basis.

We welcome Ali's insights on payments doctrine, Muslim communities and other issues.

We've really wedged ourselves between a rock and hard place with all the bankruptcy reform rhetoric of the past few years. Now that we've convinced many consumers that bankruptcy is to be avoided at all costs and can never be an acceptable part of responsible financial administration, we really need to convince them that a bankruptcy by GM and/or Chrysler would be an O.K. thing--indeed, a normal market mechanism for regulating their financial distress, far superior to government intervention. As far as I can tell, the only real problem with using the world-famous Chapter 11 to solve GM/Chrysler's problems (just as we did successfully for Continental airlines, for example) is that consumers would react irrationally, equating a Chapter 11 filing (reorganization with a view to renewed financial health) with "going belly up" or some similar rhetoric of "failure." So bankruptcy is no good for David, but it's O.K. (probably essential) for Goliath, but in an ironic twist, Goliath's business depends upon lots of Davids buying Goliath's goods, and policymakers have bent over backwards to convince David that a bankruptcy filing always reflects poorly on the filer. What a mess!

So at the end of the day, lawmakers on Capitol Hill have been loudly rejecting calls for a non-bankruptcy workout loan (or other rescue infusion of cash) for GM and Chrysler, but the Treasury would be the most likely (perhaps only) financier of a GM/Chrysler bankruptcy . . . and going into bankruptcy would produce (arguably) irrational resistance by customers who would be repulsed by a GM/Chrysler bankruptcy filing.

Seems to me we ought to get off of this merry-go-round with an out-of-bankruptcy restructuring for GM/Chrysler, funded by loans from Uncle Sam, assuming Uncle Sam's analysts can conclude that GM and Chrysler have some hope of a sustainable, competitive business down the road. That's the big question, and an interesting article in today's W$J on the latest report concerning residual value suggests that GM and Chrysler have a serious burden to carry in convincing Uncle Sam that they can make decent cars and government financial support for their business in or out of bankruptcy is warranted.

Tuesday, November 18, 2008

It was a big day today as both Henry Paulson and Ben Bernanke testified about the $700 billion bailout. Bernanke's testimony is available through the Federal Reserve. Bernanke highlights the actions taken and specific programs put in place, as well as the recent statement on lending to creditworthy borrowers. I don't have the full video of the proceedings yet, but here is a piece of it.

The Federal Reserve today announced that the Des Moines branch office would no longer be processing checks for collection. Instead, the checks will go directly through the Chicago head office for the District. An interesting twist for us teaching check collection is how this affects the time in which banks must make funds available to depositors under Regulation CC. As a result of the change, some checks that would be considered "nonlocal" will now be "local" checks subject to a more speedy funds availability rule. Under 229.12 depositary institutions must make funds available for withdrawl not later than the second business day following the banking day of deposit for local checks. For banks using a delayed availability policy, this change will mean depsitors will get access to money earlier.

This change is not the first of this type, as the Federal Reserve has already begun consolidation of check processing offices. In the end, the Federal Reserve will retain only four check processing regions, making many deposits available earlier as more checks will be "local."

Time for a hard-core commercial law teaching post. This week, I'm covering suretyship defenses, including those available to accommodation parties under UCC § 3-605. The problem is that the statutory supplement and book that I use refer to the 2002 revised version of UCC Article 3, especially § 3-605, as the "current" version. One would think a 6-year-old revision would be "current," but the problem is that only 7 states have adopted the revision. My state (Illinois) is not one of those (they are Arkansas, Kentucky, Minnesota, Nevada, South Carolina, Oklahoma, and Texas). The "old" and "current" versions of § 3-605 are quite different in at least one important respect (release of principal obligor), so what to do?

I've decided to compare the real "current" version (the pre-2002-revision one) with the "revised" version of § 3-605 (see Class no. 24). This is a lot of work, because the section is complex, but I think it's useful to emphasize the separation between the UCC as model law and the state-adopted form of the model, which are not always the same. To make matters worse, Illinois (and 18 other states) use the Multistate Essay Exam instead of testing specific state commercial law. It is not clear whether the Illinois examiners want students to apply the pre- or post-revision version of § 3-605, and wouldn't you know it, a question on this very point appeared on the bar exam relatively recently. Grrrrrrrrrr!

Monday, November 17, 2008

John Lipsky, First Deputy Managing Director, International Monetary Fund, has been a pretty busy guy these days. His speech "Towards a Post-Crisis World Economy" at John Hopkins today is no exception to his assessment to the "seriousness" of the financial crisis. The text of his speech can be read on the IMF web site. Importantly, Lipsky remarked:

[T]here is no sign yet of a fundamental reversal of the financial market dislocation and deleveraging that represents both a sign of and a contributor to the still unfolding global economic strains. To the contrary, the virulent combination of financial stress and shrinking advanced economy demand is impacting emerging economies, with potentially significant negative effect.

Lipsky has previously stressed the involvement of the United States in the world economy with a "coherent approach" by the countries as a whole. The crisis has presented particular problems for emerging economies.

Perhaps this was to soften Today's news about emerging economies. We've already blogged here about the problems of Hungary and Iceland (See Hungary Following the Way of Iceland). Iceland's economic woes have continued to grow in the wake of problems with European regulators over guarantees for depositors who lost money after Iceland banks failed last month. As mentioned before, Iceland is not alone. Pakistan can be added to the group of countries receiving aid from the International Monetary Fund with its deal for a $7.6 billion loan to help stabilize its economy, but may need double that amount.

Like the United States Treasury these days, the IMF seems to be giving out loans at an unprecedented rate. John Lipsky is busy for a pretty good reason. The emerging economies are in considerable difficulty with the financial crisis. The financial crisis has revealed perhaps more than ever the important work that the IMF does and its role in crisis response. This is by my estimation an important time for the IMF to establish itself as a key policy maker both in terms of helping to shape economic policies going forward through its loan restrictions and in working with the G-20 to respond to the financial crisis. It is too early to tell the strength of the role the IMF may have in the world economy following the financial crisis, but I suspect its influence will be expanded.

As a Vanderbilt University Law School alumni, I receive all sorts of miscellaneous emails related to the university. Recently, I received an email titled "A Message on the Economy from Chancellor Zeppos." Chancellor Zeppos, who I had for Civil Procedure as a first year law student, commented:

Vanderbilt is strong and sound, and [that] our progress will continue. In fact, a number of leading analysts have noted in public reports that, among our nation's great universities, Vanderbilt has set the standard for managing with clarity and speed the potential impact of unforeseen gyrations in the stock and credit markets.

Zeppos referenced his message to the Vanderbilt community. Surprisingly, despite the economic turmoil, Vanderbilt's endowment has returned 2.1% this year. This may be small compared with the prior two years' returns of 14.6% and 15.2%, but a small positive number is always better than negative.

Northwestern reports its endowment being "hurt" by recent market declines.

So what does all this mean? Most of these schools were careful not to deliver all the bad news about the endowments right away. Probably a good thing, as the depth of the decline may not even be fully known now. Happily, the same university reports of declining endowments, though, are being met with what appears to be fiscal conservatism. That is, universities are reassessing new plans and looking over budgets to trim costs. This all sounds good to me in economic hard times.

But then today, I read in the Wall Street Journal that the compensation of university presidents was actually on the rise. The top ten list goes from Carl Patton at Georgia State University making $727,487 to E. Gordon Gee at Ohio State University making $1,346,225 for 2007-08. Even public university presidents were up about 7.6 percent over the prior year. Although retention of key personnel is important to universities, the current financial crisis should be a call to universities to trim compensation when faculty and staff salaries are remaining flat.

Today's announcement by Goldman Sachs key executives to forgo their 2008 bonus compensation should be a message to all that hard economic times are here. Certainly, universities will be trimming budgets to meet the financial crisis and declines in endowment value and revenues. Following the lead of Goldman, some university presidents might find themselves following suit on compensation.

Thursday, November 13, 2008

Treasury Secretary Henry Paulson spoke this week. Jason Kilborn's post on Ray of Light for Those Feeling Grouchy does a good job of calling Paulson on the rhetoric about lending. That said, the government is clearly worried that targeted action has been taken without results. Credit markets are still tight, enough that the Federal Reserve issued a joint statement with the FDIC, Comptroller of Currency and Office of Thrift Supervision reminding banks of their important position in the economy as lenders recently in their Interagency Statement on Meeting the Needs of Creditworthy Borrowers. This seems a simple principle, but as Jason Kilborn remarked here lately, What's the Holdup?

Paulson's talk was quite lengthy, but he did deliver the message that the problems of the auto manufacturers are not within the scope of the TARP (Troubled Asset Relief Program). This leaves a pretty big issue on the table, which must be addressed. If auto is not in the scope of TARP, then separate intervention is inevitable and necessary. That does not mean, though, that it will actually happen. It seems politically difficult, at least under the Bush Administration as many Republicans oppose aid for the automakers.

Despite this improvement, as I noted earlier, banks still are not passing this greater liquidity through to the markets that need it. Paulson today exhorted banks to step up and "play their necessary role to support economic activity," but one wonders how powerful this kind of rhetoric can be. If the banks took hundreds of billions from Treasury and hoarded it, knowing full well that the money was passed out to stimulate lending and offer the economy a much-needed liquidity infusion, what makes Paulson think his telling banks to lend will make a difference? I hope I'm wrong, and the banks will react to Paulson's entreaty, but call me a skeptic.

Paulson's new plan for using the TARP facility seems to me to be better targeted toward fixing what really ails the U.S. economy now--consumer confidence, closed pocketbooks, and inability to get loans to leverage future earning capacity to support smoother current spending. This kind of consumer investment (spending) represents 2/3 of our economy, so juicing this sector sounds like a great idea. Again, more careful underwriting of consumer credit extension is clearly needed, but if liquidity is to find its way into the system to do the most good, the consumer portal seems like a more direct and immediately effective point of entry.

I am impressed by the agile and flexible way in which Paulson and the other managers of this rescue plan have considered options, quickly abandoned ones that didn't seem to work, and moved on to alternatives that offered better prospects. This resistance to getting bogged down by sunk costs and inertia is, it seems to me, the heart of vibrant entrepreneurialism. This kind of pragmatic flexibility is what has made the U.S. economy so great, in my view. I am hopeful that this kind of agile entrepreneurialism will bring us through these tough times.